The Netherlands proposes to amend its holding regime

On 15 September 2015, the Dutch Minister of Finance submitted the 2016 budget proposal (the Budget) to the lower house of parliament. The Budget includes amongst others a draft amendment of the Dutch participation exemption, the Dutch non-resident taxation rules and the Dutch dividend tax rules for cooperatives.¹ If accepted in their current form by the parliament, the new rules should apply as of 1 January 2016. These proposed amendments follow the recent changes made by the European Council to the so-called Parent Subsidiary Directive (the Directive)² implementing a common anti-abuse rule. This newest Directive may impact holding companies throughout Europe including the Netherlands. We summarise below the Dutch proposals.

The Directive aims to exempt dividends and other profit distributions from withholding taxes and eliminates double taxation of such income. Its goal is to provide for a level playing field between groups of companies active in one member state and groups active in multiple member states. However, the exemptions provided for in the Directive should not extend to abuse situations. Against this background the European Council included an anti-hybrid mismatch provision and a common minimum anti-abuse rule (the Changes) in the Directive.

In line with OECD and G20 efforts, the member states should therefore not be allowed to grant companies tax exemptions to received distributed profits to the extent that such profits are tax-deductible at the level of the subsidiary. While some member states apply domestic or agreement-based provisions aimed at tackling tax evasion, tax fraud or abusive practices, those provisions may have different levels of severity and, in any case, are designed to reflect the specifics of each member state’s tax system. According to the new anti-abuse rules, member states should not grant the benefits of the Directive (i.e. no dividend withholding tax nor income tax on dividend received) to an arrangement that is put into place with the main purpose, or one of the main purposes, to obtain a tax advantage and that serves no valid commercial reasons that reflect economic reality.

The European Council obliges all member states to adjust their domestic laws, regulations and administrative provisions in such way to comply with the newest provisions of the Directive by the end of 2015.

In order to comply with the Directive’s newest obligations, the Dutch Minister of Finance includes an amendment of three provisions in the Budget: the Dutch participation exemption, the Dutch non-resident taxation rules and the Dutch dividend tax rules for cooperatives.

Dutch participation exemption: The Dutch tax exemption for income derived from qualifying participations, including dividends and capital gains, shall no longer be applicable to the extent the income from a qualifying participation (directly or indirectly) consists of expenses and payments that are deductible from the foreign participation’s taxable profits (i.e. a mismatch situation). The goal of this new provision is to ensure that income from hybrid instruments is taxed and to discourage the use of these types of instruments. However, contrary to the Directive which is limited to European transactions only, this provision has a world-wide scope. There is also no option to provide proof to the contrary that no abuse is sought. The scope of the new provision is broadly drafted so that it also includes the sale of hybrid instruments (to the extent the sale price does not relate to the principal amount).

Dutch non-resident taxation rules: Dutch corporation tax can be levied from a non-resident shareholder in a Dutch legal entity if it owns a “substantial interest” (generally an interest in the Dutch legal entity of 5% or more) with the main purposes, or one of the main purposes, to avoid income tax or dividend tax of another entity and it concerns an artificial arrangement. An arrangement is considered artificial if it is not put in place for valid commercial reasons which reflect economic reality. The main change in the wording of the non-resident taxation rules is the elimination of the so-called enterprise test. This is apparently done to bring the wording of this provision in line with the wording of the Directive. However, the parliamentary proceedings seem to indicate that current guidance on this point materially remains in force. One change to the current regime is that the immediate holder of a substantial interest should have sufficient substance in its jurisdiction, where this substance will be tested on the basis of the Dutch minimum substance requirements (we refer to our newsletter of January 2015).

Dutch dividend tax rules for cooperatives: Dutch dividend tax currently contains an anti-abuse provision for structures that interpose a cooperative with the aim to avoid dividend tax or income tax of another entity. The Budget proposes to bring this provision in line with the Directive wording: Dividend tax would be due on distributions by a cooperative if the cooperative owns a subsidiary with the main purpose, or one of the main purposes, to avoid dividend tax or foreign tax of another entity and it concerns an artificial arrangement. The parliamentary proceedings indicate that a cooperative will generally need to have people on its payroll and its own office space in order to avoid the characterisation as artificial arrangement.

The Changes are an attempt of the European Council to prevent mismatch situations and streamline solutions for pan-European abuse structures. The implementation of the Changes in Dutch tax law was to be expected. It will most likely put an end to most hybrid mismatch structures that currently are covered under the Dutch participation exemption. The change to the non-resident taxation rules and the dividend tax position of cooperatives may also trigger a need to review and adapt structures with limited substance. However, the Changes also include new terms and their scope seems to go beyond the current European Court of Justice case law. As this Budget is only a proposal of law that needs to be discussed in Dutch parliament, it is still subject to change. We will keep you updated on further developments.